Treasurys slip as Dow, oil flex muscle

Host of economic news, capped by jobs, due this week

By

RachelKoning

WASHINGTON (CBS.MW) - Prices on U.S. government-backed notes and bonds slouched on Monday, as a surge for the Dow Jones Industrial Average soothed concerns in the broader financial arena and erased a flight-to-quality bid that early this month sunk yields to year lows.

Oil prices also rose on conflicting expectations for future production, which weighed on the inflation-sensitive bond market.

A government economic report that showed the highest level of consumer spending in seven months rejuvenated inflation concerns.

The short end of the Treasury yield curve - a line formed by plotting the returns of a range of securities from shortest to longest maturity - looked attractive early in the session and in the past several weeks on thoughts stocks were up against more selling.

But the major equity indices - particularly the Dow Jones Industrial Average -- held up above water. The DJIA tacked on 2.3 percent on the final bell, as the technology-studded Nasdaq stumbled. Read more in Market Snapshot.

The Treasury Department on Monday announced its borrowing needs for the October to December period and is expecting a debt paydown of $23 billion, with a cash balance of $30 billion on Dec. 31.

The forecast tops expectations at the last quarterly refunding announcement that called for an expected paydown of $10 billion. A government debt paydown in the final three months of the calendar year will happen for the first time in more than 30 years, the Treasury confirmed.

The Treasury expects to have to raise $20 billion in the January to March 2001 period, a time of year when regular obligations typically call for issuing more debt.

Tighter supplies of debt, particularly long-dated issues, have boosted the value of the 30-year bond.

That said, a 30-year bond continues to out yield its shorter-dated counterparts.

The difference in yield between a 30-year bond and a 2-year note stood at negative 18 basis points on Monday compared to negative 20 basis points in the previous session.

A shortage of long bonds owed to government budget surplus has placed these securities at a premium to other issues, although the negative spread in yield is down from a 75-basis-point peak in May. Typically, an investor should receive more yield for taking on a riskier long-dated instrument, but investors are willing to sacrifice some yield to get their hands on the ever-scarcer investments.

Consumers spend more

Boosted by one-time farm subsidy payments, personal incomes soared 1.1 percent in September, while consumer spending surged 0.8 percent, largely because higher energy costs took a bigger bite out of their wallets, data from the Commerce Department released Monday showed.

Although the data did serve to depress Treasury prices a bit, some economists said the bigger picture on consumer spending shows demand has retreated from its recent peak.

"The Fed was concerned that the 5 percent to 6 percent consumer demand growth in 1998-99 was too fast relative to supply growth. The past three quarters have been exceptionally volatile, due to statistical seasonal adjustment problems and to swings in the stock market," said David Orr, First Union chief economist. "Averaging the second quarter and the third quarter shows a 3.8-percent pace [of consumer spending], which is near where we think the new rate will be going forward."

Volume in the Treasury market stood at $14 billion in the middle of the day, about 9 percent below the average of the last five sessions.

Analysts said participants were largely sidelined ahead of a flurry of economic news set to hit the wires this week, including: NAPM manufacturing data, housing and consumer statistics, productivity numbers and the always closely watched employment report.

The Federal Reserve will also release its "Beige Book" report on economic conditions around the country.

The Treasury Department will detail its borrowing needs for the fourth quarter this week as well, which gives investors an idea of the scope of supply set to hit the market in coming days.

In other financial corners

Oil prices dipped then recovered on mixed messages Monday.

In afternoon dealings, oil futures rose on lingering concern over a possible disruption in Iraqi exports and an OPEC output hike of 500,000 barrels per day set to begin Tuesday.

On the New York Mercantile Exchange, December crude added 39 cents to $33.13 a barrel.

The dollar was mixed against its major counterparts. Fixed-income participants continue to monitor the health of the euro, which last week notched fresh all-time lows. If the fledgling currency should cause global stock market trouble, investors might opt to protect funds in the safety of the U.S. Treasury market.

One euro was trading at 84.24 cents, up about 0.2 percent on the dollar. Dollar/yen added 0.2 percent at 108.83 yen.

On the Commodities Exchange division of the New York Mercantile Exchange, December gold rose 40 cents to $266.30.

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